Outside editorial: 'Sick Man' checkup

Posted: Monday, February 18, 2008

This editorial appeared in the Los Angeles Times:

Pop quiz: Which country is the world's biggest exporter? Nope, it isn't China - at least not yet. It's Germany. That "sick man of Europe" is often associated with high unemployment, lack of competitiveness and a bloated public sector. Yet propelled by high-end exports of autos, machinery and chemicals, Germany racked up a record trade surplus of $288.5 billion last year.

Meanwhile, the U.S. trade deficit narrowed last year for the first time since 2001, the Commerce Department announced Thursday. The deficit for 2007 fell 6.2 percent to a merely stratospheric $711.6 billion. The good news is that a weaker dollar contributed to a 12 percent surge in U.S. exports. But much of the improvement in the trade statistics came from a weaker U.S. economy that sucked up fewer imports.

So, with the U.S economy reeling under twin housing and credit crises, should America be looking over its shoulder at Germany for lessons? Certainly, the "sick man" is showing unexpected signs of vigor. Fueled by its exports, Germany's growth last year was 2.8 percent. And while Germany's economic performance and per-capita income have lagged behind the U.S. for most of the last 30 years, its bloated government spending hasn't actually been quite as bloated as ours of late. In 2009, the U.S. national debt will amount to nearly 66 percent of gross national product. Germany's national debt, while still hefty, will fall to 63 percent of GDP.

The danger isn't that dollar-flush foreigners will keep buying up American assets such as Citigroup on the cheap. What is worrisome is when public debt levels become so high as to require higher taxes while private indebtedness depresses consumer spending. Both could become a drag on U.S. economic growth.

The U.S. should not try to emulate Germany's export-dependent economy; its sluggish growth is likely to continue to underperform the U.S. in the long run, argues economist Adam Posen. Moreover, China is expected to overtake Germany as the world export champ this year. What matters, Posen says, is that the money the U.S. borrows from foreigners is invested for productive purposes. Yet it surely couldn't hurt to export more and borrow less.